A report, published by the Treasury Committee, has advised that a rise in taxes could undermine the economic recovery of the UK from the coronavirus pandemic, but has outlined a series of long-term tax reform recommendations that it says will be needed in the future.
But the report also dismissed the idea of a wealth tax, which has been advocated by some in the wake of the pandemic, saying its development and administration would be "extremely challenging".
The report said pensions tax relief, which was the second most expensive tax relief, costing £20.4bn in 2018-19, was "regressive" since most of its benefits accrued to those in the top earnings decile and as a result it should be "urgently" reformed.
It said reducing this cost could make a significant contribution to public finances, achievable by replacing the lifetime allowance with a lower annual allowance as well as the introduction of a flat rate of relief.
The MPs also said stamp duty was "economically inefficient" and damaged the economy by affecting how and when people bought homes. They said its reform should be prioritised.
Another area where the report called for reform was the taxation of the self-employed, saying a restructuring was "long overdue", as the current system was "unfair and unsustainable".
In January, the Institute for Fiscal Studies found that, for a job generating £40,000, £3,300 more tax was paid when the job is completed through an employment contract rather than by someone who is self-employed.
The chancellor had previously warned that taxation of the self-employed would come under review, saying last March: “It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”
Previous chancellor Phillip Hammond tried to address this issue in 2017, increasing national insurance levels for self-employed people, however this was subsequently abandoned after he was accused of planning to break a manifesto pledge.
Mel Stride, chairman of the Treasury Committee, said: “Tax is often an area of significant disagreement between parties, so I am particularly pleased that the cross-party Treasury Committee has unanimously agreed this report for our Tax After Coronavirus inquiry.
“With our public finances on an unsustainable long-term trajectory, our clear message is that Budget 2021 is not the time for tax rises or fiscal consolidation, which could undermine the economic recovery. But we will probably need to see significant fiscal measures, including revenue raising, in the future.”
The committee also warned that the government’s tax lock manifesto commitment, which covers income tax, national insurance and VAT, will come under significant pressure over the coming weeks and months.
The report has recommended that a moderate increase in the corporation tax rate, currently at 19%, could raise revenue without damaging economic growth. However, it noted that ‘a very significant increase’ in the corporation tax rate would be ‘counterproductive.’
The cross-party body says that any increases to corporate tax rates should run parallel to other support packages, such as enhanced loss relief and more generous capital allowances, in order to maintain a steady recovery.
Speaking to Sky over the weekend, chancellor Rishi Sunak said: “We do have a challenge in our public finances and if we don’t do anything, borrowing will continue to be at very high levels. Even after we’ve recovered from Covid, debt will continue to rise indefinitely and that’s not a good situation.
“I think in the short term what we need to do is protect the economy and keep supporting the economy through the road map, and over time what we need to do is make sure our public finances are sustainable.”
